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  /  News   /  Trump tariffs threaten to crack open North American economies

Trump tariffs threaten to crack open North American economies

MEXICO CITY — President-elect Trump’s pledge to impose tariffs on Mexico and Canada threatens to upend decades of North American integration, a bumpy process that’s recast the two U.S. neighbors as providers of raw and finished goods for the world’s biggest economy.

In some ways, Canada and Mexico have traded places over the past three decades.

Before the North American Free Trade Agreement (NAFTA), Mexico was a mid-tier petrostate without a competitive industrial base. Now, its economy is dependent mostly on manufacturing, tourism, agricultural exports and cash sent home by Mexicans abroad.

Meanwhile, Canada went from a small but advanced manufacturing economy to an oil and gas giant, funneling massive amounts of hydrocarbons to the United States.

Those transformations have both taken place to fit neatly into the U.S. economy’s larger needs.

But that three-way integration is facing headwinds, not least from Trump, who on Monday threatened United States-Mexico-Canada Agreement (USMCA) partners with 25 percent across-the-board tariffs on day one of his presidency in retaliation for their roles in migration and the illicit fentanyl trade.

“Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem. We hereby demand that they use this power, and until such time that they do, it is time for them to pay a very big price!” Trump posted on Truth Social.

At risk, beyond the harmony of North American diplomatic relations, are the fundamentals of the continent’s manufacturing base.

“The value chains — the value chains have been designed around the context of integration,” said Ildefonso Guajardo, Mexico’s former secretary of Economy and lead negotiator on the USMCA

Value chains or supply chains — producing and assembling parts throughout the continent before putting them into a final product — have become a key competitive advantage for North American industry writ large, and the raison d’être for a broad segment of Mexican industry.

Those chains only exist in Mexico thanks to massive infrastructure investments, ranging from road and rail connections to gas pipelines to industrial parks that can cover nearly 10,000 acres.

And the value chains extend beyond automotive or TV manufacturers. For example, the gas pipelines in Mexico are pumping U.S. natural gas.

Overall U.S. exports of the hydrocarbon, including pipeline exports and liquefied natural gas exports on ships, have ballooned since 2014, when the United States sold 1.5 trillion cubic feet of gas abroad, to 7.6 trillion cubic feet in 2023, according to the U.S. Energy Information Administration (EIA).

Pipeline exports go exclusively to Canada and Mexico. In 2014, Canadian imports began to plateau at around a trillion yearly cubic feet of gas, and Mexican pipeline imports took off, reaching 2.24 trillion cubic feet in 2023, according to EIA.

Though energy and manufacturing are by far the biggest segments in North American trade, food supplies have also gone through a massive transformation, opening markets for U.S. grain and Mexican produce that have boosted rural areas in both countries.

“These are American farmers’ three largest export markets,” said Farmers for Free Trade Board President Bob Hemesath, an Iowa corn, soybean and hog farmer, referring to Canada, China and Mexico. “America exported $84.7 billion in food and ag to these three countries alone last year, constituting nearly half of all food and ag exports. Mexico and Canada also have been partners in USMCA and NAFTA, agreements that have grown U.S. ag exports to those countries by nearly 300 percent,” Hemesath added.

“We don’t yet know exactly what action President Trump will take when he enters office. But we do know that a renewed trade war will hurt American farmers. A trade war will mean retaliatory tariffs, lost ag trade markets, a leg up for farm exporters in South America and elsewhere, and billions in lost exports.”

Trump, who opposed NAFTA, has in the past threatened to blow up the economic integration that resulted from the 1994 deal.

He forced the negotiation of USMCA to replace NAFTA during his first term, and though the two deals had many similarities, at the USMCA signing ceremony he declared the end of “the NAFTA nightmare” and called the new agreement a “truly fair and reciprocal trade deal that will keep jobs, wealth and growth right here in America.”

Renewed attacks against USMCA are frustrating for some of NAFTA and USMCA’s defenders, most of whom were not pining for a renegotiation of the original deal in 2017.

“Well, basically, what it loses is credibility. Because, as you remember, this agreement was negotiated by the Trump administration, and when a country is not backing its words, in this case, negotiated by the incoming president, well, the first thing you lose is credibility,” Guajardo said.

“Who is going to believe you next time you give your word to an agreement, regardless of the nature of the agreement?”

That broader concern, with greater geopolitical considerations, is making some observers weary.

“Violating the terms of our own agreements only ruins our reputation and loses everyone’s trust in the USA. And making our mutual defense alliances ‘pay as you go’ Mafia-style protection rackets will not help,” said a former U.S. trade negotiator who asked for anonymity to speak frankly.

But there’s a broad recognition that the instability is a feature, not a bug, of Trump’s diplomatic style.

Rep. Henry Cuellar (D-Texas) of Laredo, a vocal proponent of U.S.-Mexico trade, told NewsNation’s Blake Burman on “The Hill” that Trump will at the very least get Mexico’s attention with the threats.

“Well, let me put it this way: Laredo’s the largest port; we handle 40 percent of all the trade between the U.S. and Mexico. I know this is a way to negotiate, get some leverage. I know that Mexico will come to the table,” said Cuellar.

“But nobody wants a 25 percent tariff on them, and the Mexicans are threatening to do the same thing, and we don’t wanna get into that.”

In 2019, Trump successfully leveraged tariff threats against former Mexican President Andrés Manuel López Obrador to force Mexico to enhance its internal immigration enforcement.

President Claudia Sheinbaum, López Obrador’s successor and protégé, responded to the renewed threats with a letter raising other grievances, including U.S. illicit gun exports and drug consumption, and vowing tit-for-tat tariffs on U.S. goods.

Mexico is the biggest importer of U.S. goods, including energy products such as natural gas.

“President Trump, migration and drug consumption in the United States cannot be addressed through threats or tariffs. What is needed is cooperation and mutual understanding to tackle these significant challenges,” wrote Sheinbaum.

“For every tariff, there will be a response in kind, until we put at risk our shared enterprises. Yes, shared. For instance, among Mexico’s main exporters to the United States are General Motors, Stellantis, and Ford Motor Company, which arrived in Mexico 80 years ago. Why impose a tariff that would jeopardize them? Such a measure would be unacceptable and would lead to inflation and job losses in both the United States and Mexico.”

Sheinbaum’s U.S.-Mexico vision — excluding Canada — was a mirror image of Canadian Prime Minister Justin Trudeau’s own reaction, touting U.S.-Canada relations and subtly taking digs at Mexico. Trudeau also reportedly met with Trump at his Mar-a-Lago resort on Friday.

“Trump is always using divide and conquer-type techniques. At some point, I believe that that should be a well understood by the other two parties, it is a boat that we’re all sharing. There are a lot of Canadian companies in Mexico,” Guajardo said. “Canada has a lot to lose if Mexico is not in the agreement.”

“So regardless of political rhetoric, that is arising by the next elections in Canada, I think that at the end, most corporate Canadians and Mexico will have to look at this, as we did in the first negotiation,” he added.

That bet that cooler heads will prevail also hinges on the incoming Trump administration’s appetite for risk.

There is broad agreement among economists that a trade war with Canada and Mexico would raise prices for American consumers, but both countries’ relationships with the United States are asymmetrical, meaning they each stand to lose much more than Trump.

And part of Canada’s argument against Mexico — that the Latin American country has a much more extensive trade relationship with China — could backfire, giving Mexico leverage in bilateral negotiations to say it will have no choice but to further expand those ties.

Yet even that leverage would likely prove insufficient in the face of a Trump administration willing to tank North American integration.

“Mexico could probably negotiate a bilateral agreement or perhaps sectoral accords with the USA under new and most likely disadvantageous and asymmetric conditions,” said Victor Arriaga, a former Mexican diplomat and editor of a daily newsletter in Mexico on U.S. politics.

“China is no substitute for USMCA; in terms of costs and chain supplies, the U.S. market would still remain attractive. Access to the U.S. market of goods produced in Mexico with Chinese technology would eventually face difficulties. Historically, Mexico’s attempts to diversify trade partners have had limited success.”

But consequences for the United States, even if commercially advantageous, could generate global shockwaves.

“When the U.K. left the EU it only screwed itself, but if we leave the USMCA and NATO and all our other alliances, it will screw the world,” said the former U.S. trade negotiator.